Photo of Eric R. Ebbert, CFP®, MBA, CEO Eric R. Ebbert, CFP®, MBA, CEO Dec 12, 2020

It is always good to review your tax planning strategies toward the end of every year, but because of some changes introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, you need to give extra attention to how you plan for getting the most out of filing for 2020 taxes.

Whether approaching the end of the year or trying to plan ahead, you need to consider how you can take advantage of these five tax planning strategies.

Five tax planning strategies

  1. Capital gains — Income from investments are taxes as capital gains. There are two types of capital gains: short-term and long-term. Investments held for less than one year are considered short-term, and those held for longer than one year are considered long-term.
    Review how your capital gains will be taxed if you sell your investments. For investments that are performing poorly, you may want to sell them before the end of the tax season. Even if you take a loss, you may save on overall taxes by lowering your taxable income for the year. This is known as tax-loss harvesting
  2. Net investment income tax (NIIT) — Taxpayers earning more than $200,000 per year ($250,000 if married filing jointly or $150,000 if married filing separately) may be subject to NIIT. This amounts to 3.8% of whatever is lower, your net investment income or the amount by which your modified adjusted gross income (AGI) exceeds your threshold.
    You could sell capital in regular installments so your gains are spread over a number of years. This can reduce your NIIT or eliminate it for the current or future tax years. Additionally, selling underperforming gains for tax-loss harvesting can lower your NIIT.
  3. Medical deductions — In 2020, medical expenses can be deducted if the expenses exceeded 7.5% of your adjusted gross income. This includes health insurance premiums, long-term care premiums, and other medical, dental and prescription drug services.
    One way to take advantage of medical deductions is to pursue any elective procedures your doctor recommends within the same year rather than spreading them over multiple years (as long as this is safe according to your doctor). This will help you exceed the 7.5% limit and write off medical deductions from your taxes.
  4. Charitable contributions — Charitable contributions are always tax deductible, but the CARES Act has introduced some changes. Cash donations to public charities are fully deductible up to 100% of AGI. Other gifts are deductible up to 40% of AGI. Taxpayers who do not itemize deductions can claim up to $300 in deductions for 2020.
    When approaching the end of the year, review which tax bracket you are going to end up in. If you are close enough to falling under the next lowest bracket, you may want to make some charitable contributions to lower your taxable income into the next bracket.
  5. Retirement contributions — Your contributions to a 401(k) or traditional IRA are deducted from your taxable income. These are not taxed until you make withdrawals.
    Check how much you have contributed and, if you can, max out your contributions for the year to boost your savings and simultaneously lower your taxable income for the year.

Talk to a ProVise CFP® professional about planning for the tax season

Planning for your taxes when you do not have much time or expertise can feel like walking around your home blindfolded. You might have some idea of where you are going, but without your vision or someone to guide you, you are bound to walk into something. At ProVise Management Group, our team can act as your guide in the foggy fiduciary landscape to help you get the most out of your taxes and your personal financial plan.

Our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about planning for the tax season? Contact ProVise today to schedule a complimentary consultation.